Cousins Properties Inc (CUZ) 2017 Q2 法說會逐字稿

Good morning, everyone, and welcome to Cousins Properties second quarter conference call.

(Operator Instructions) Please also note, today's event is being recorded.

At this time I would like to turn the conference call over to Ms. Pam Roper, General Counsel.

Ma'am, please go ahead.

Good morning, and welcome to Cousins Properties' second quarter earnings conference call.

With me today are Larry Gellerstedt, our Chief Executive Officer; Colin Connolly, our Chief Operating Officer; and Gregg Adzema, our Chief Financial Officer.

The press release and supplemental package were made available on the Investor Relations Page of our website yesterday afternoon as well as furnished on Form 8-K.

In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements.

Please be aware that certain matters discussed today may constitute forward-looking statements within the meaning of federal securities laws, and actual results may differ materially from these statements due to a variety of risks and uncertainties and other factors.

The company does not undertake any duty to update any forward-looking statements whether as a result of new information, future events or otherwise.

The full declaration regarding forward-looking statements is available in the press release issued yesterday, and a detailed discussion of some potential risks is contained in our filings with the SEC.

With that, I'll turn the call over to Larry Gellerstedt.

Thanks, Pam, and thanks, everyone, for joining us this Friday morning.

As the current economic cycle expands, I'm very pleased to report that business conditions and real estate fundamentals in our markets remained very positive.

Population and [altitudes] in job growth in the Sunbelt continues to outpace the broader market.

And the region has emerged, post recession, as an affordable business-friendly environment, with vibrant urban cores and a young highly-educated workforce.

With corporations migrating to the Sunbelt to chase talent, and existing businesses experiencing accelerated organic growth, we have seen office vacancies in our markets hit 15 year lows.

In my opinion, this is a very impressive and important measure.

However, this increased demand, while welcome, has generated a modest level of new office construction across the Sunbelt, especially in our core markets of Atlanta, Austin and Charlotte.

Thankfully, a majority of the new space has already been leased and delivered and with the lack of office sites available in many of our urban submarkets, we see little to no additional speculative supply breaking ground on the immediate horizon.

Strong markets, healthy demand and manageable levels of new supply continue to support the positive outlook for Cousins in our urban Class A office portfolio.

6 months into 2017, we have leased or renewed 912,000 square feet of office space.

Our 15.5 million square-foot operating portfolio sits at 93.2% leased, with 4 of our markets, 95% leased or greater.

Both, our same property portfolio and the legacy Parkway same property portfolio, continue to perform extraordinarily well.

When you combine the 2 portfolios, cash NOI for the first half of 27 (sic) [2017], increased 10.2% when compared to the first 6 months of 2016.

In addition to leasing and operational success during the first half of the year, we completed $365 million in dispositions, of which Cousins proceeds totaled $316 million.

At the same time, Gregg and his team made quick work of managing our near-term debt maturities and solidifying our balance sheet with a successful equity raise and debt placement.

Rounding out Cousins' strong execution year-to-date, we've started to deliver our development pipeline.

First, 8000 Avalon, our 224,000 square-foot office building, anchored by Microsoft, delivered in the second quarter, 73% leased.

Moreover, just last week, we finalized another 49,000 square-foot lease, which once executed, will bring the asset to 95% leased.

With the successful lease up of 8000 Avalon, it rents mirroring what the Class A -- what the Buckhead Class A market currently achieves.

We are confident in the long-term outlook for this niche market in Atlanta.

Therefore, we have exercised our option to purchase the second and only remaining office partial at the Avalon, with our joint venture partner, Hines.

We are currently designing the new office building, but we will not break ground until we achieve meaningful pre-leasing.

Earlier this month, we delivered Carolina Square.

Our mixed-used asset near UNC's Campus in Chapel Hill.

At quarter end, the residential component was 80% leased with residents projected to take occupancy in the third quarter.

Also on July 23, Target, the project's flagship retailer, held its official grand opening.

Over the course of the next several weeks, we expect our new residents, office users and retailers to take occupancy, with the projects stabilizing within the next 12 months.

The NCR Global Headquarters in Midtown Atlanta is progressing very well, with NCR on schedule to take occupancy of Phase 1 in January of next year.

To date, we have turned over 14 floors to NCR for tenant improvement build-out, and will deliver an additional floor every month.

Phase II is also well underway, and is tracking on schedule for NCR to take occupancy in December of 2018.

I'd like to spend the balance of my time this morning, giving you an update on our ongoing evaluation of the new markets we entered via the Parkway merger.

Tempe has emerged as a bright spot in the new portfolio from the start.

In the last 9 months since completing the merger, Matt Mooney and his team have signed 394,000 square feet of new and renewal leases, including long-term leases, with quality credit tenants, like ADP and Amazon.

Our ticket portfolio is now 97% leased.

New to the market inquiries and expansion demand from existing customers validates the strength of this urban submarket.

Tempe's characteristics mirror what we have experienced in Austin.

Companies are drawn to the low-cost, business-friendly environment, near a young, affordable and highly educated workforce.

Austin's workforce draws from the University of Texas, and Tempe draws from Arizona State University, the largest university in the country with over 80,000 students.

Our Tampa assets are located in the leading and most desirable submarket in the city.

The Westshore submarket, and in particular, our Corporate Center assets command top rents in Tampa.

And with Class A product in this submarket now 91% leased, we are beginning to see meaningful rent growth.

Post merger, the team has executed 260,000 square feet of new or renewal leases, including Amgen for 125,000 square feet.

Our Tampa portfolio is now 95% leased, as of quarter end, up from 88% leased when we closed the merger in October of last year.

After spending much time on the ground in Orlando for well over a year, we feel our opportunities to grow and scale the platform are limited.

Therefore, in the fall, we will bring our Orlando CBD assets to the market for sale.

We believe the timing could not be better, as Orlando's fundamentals continue to strengthen.

Class A vacancy has dropped to 9%, and we see an uptick in activity with no new supply on the horizon.

So where do we plan to put the capital to work?

First, we are encouraged by the uptick and built-to-suit demand in our markets.

We also have multiple requests from our existing customer base, to expand in markets where there is no immediate space to accommodate them.

While there is nothing immediate to announce at this time, we hope to start another project or 2 this cycle.

However, we will proceed with discipline, looking only to deploy capital at this point in the cycle on build-to-suits, or significantly leased multi-tenant buildings.

Second, we continue to monitor the acquisition market as an additional avenue for growth.

To date however, we have yet to find an opportunity of interest that we can make pencil out.

But we will be ready when the asset pricing becomes attractive.

Before I turn the call over to Colin, I would like to announce 2 organizational changes, the Board of Directors voted on earlier this week.

First, the board has asked and I have agreed to expand my role as CEO to include Chairman of the Board.

I'm pleased to have the opportunity to continue to lead such an accomplished team, and an honor to serve the company as an Executive Chairman.

Also in recognition of his leadership role and the successful implementation of Cousins strategy, most notably, his work alongside with Gregg and Pam on the Parkway merger, Colin was elected by the board to serve as the President and Chief Operating Officer, and we congratulate Colin.

On behalf of the board and the Cousins team, we look forward to continue our work together as we drive the next phase of growth for the company.

With that, I'll turn it over to Colin.

Thank you, Larry.

I am honored to continue to serve Cousins in partnership with you as well as Gregg, Pam and the entire Cousins team.

With our urban trophy portfolio, rock-solid balance sheet and talented team, I couldn't be more confident that many great opportunities lie ahead for Cousins.

Switching to this quarter's activity, I would like to begin my comments by highlighting some important headlines from the quarter.

Next, I will provide some specific market updates and give color surrounding what we see at the portfolio level.

Starting with leasing.

Cousins had another strong quarter.

The team leased 341,000 square feet of office space during the quarter, and both GAAP and cash mark-to-market on second-generation leases and renewals, posted an impressive marks at 28.5% and 13.5% respectively.

Our triple-net rental rate was up 26% as compared to the same period last year, and net effect of rent, which includes TIs, commissions and free rent, increased 35% compared to the second quarter of 2016.

While this quarter's velocity decreased from previous levels, this is primarily due to our portfolio being over 93% leased and expirations through 2018 account for less than 10% of leased space.

As a whole, we were pleased with the quality of leases signed and the terrific economic metrics achieved.

Moving on to our markets, let me start with Atlanta, our largest market.

Across the metro area, we continue to see positive real estate fundamentals, fueled by steady demand and a moderate level of new supply.

As the Southeast’s largest office market, Atlanta features 3 critical components for long-term growth: affordability, high educational attainment and a world-class airport.

We believe these attributes have been the catalyst for attracting new companies as well as organic growth within the market.

At quarter end, our 6 million square-foot Class A portfolio was 91.4% leased.

Activity in Atlanta for the quarter was strong.

The team leased or renewed 225,000 square feet of office space.

The most meaningful change to our Atlanta operating portfolio in the second quarter, was our exit from Downtown Atlanta, with the sale of the American Cancer Society Center, which brings our Atlanta concentration to roughly 34% of NOI, with a majority of our portfolio located in Buckhead, Midtown and the Central Perimeter submarkets.

As I indicated on our prior calls, the significant area of focus for us, in Atlanta, is at Northpark Town Center, our 1.5 million square-foot office complex in the Central Perimeter.

The team has made excellent progress during 2017, led by the 179,000 square-foot WestRock lease, which is slated to commence by year-end.

As previously disclosed, 105,000 square-foot block of space will become available during the second half of the year, with the move-out of Equifax and Aetna.

We feel optimistic though about our team's ability to backfill this space in the coming quarters, at rent significantly above the expiring in-place rental rates.

The Central Perimeter submarket traditionally attracts larger customers and Fortune 500 companies, and we believe due to its superior locations, Northpark has the most attractive large block available in the Central Perimeter today.

Turning our attention to Buckhead.

I've got exciting news to report at Terminus.

Amazon currently leases a floor in the 200 building, was looking to expand its footprint Buckhead as it continues to grow its a9.com subsidiary.

Through some creative reshuffling, the team was able to renew and expand Amazon to take 50,000 feet in total, rolling rents up 10% on a blended basis.

This expansion and renewal are set to commence in January of 2018.

So in the short term, you will see a different occupancy, as we terminate one existing customer and relocate another to accommodate Amazon's growth needs.

In our Terminus 100 building, we are marketing the additional 140,000 square feet that will become available in 2019, as a result of CBRE and Bain's announced moves.

The team is seeing good activity though, and already working on a multi-floor deal to backfill some of the space.

With Tishman Speyer's Three Alliance project, now well-committed and no new office construction underway in Buckhead, we're hitting a good window to release the space, given the 2 year of lead time.

If you walk down Peachtree Road, at One and Two Buckhead Plaza, we continue to reposition the assets, and execute our ongoing value-add strategy.

Thanks to its fantastic Peachtree and [Westchase] address, and recent building improvements that have been completed, we have been successfully increasing rental rates to the high end of the Buckhead market.

Given that, through 2019, we have lease expirations totaling 10% of the building's total square footage.

This is a great mark-to-market opportunity for the company.

Albeit with some potential short-term drops in occupancy, that will ultimately drive NOI and long-term value for shareholders.

In Charlotte, we are pleased to see a healthy rebounds in leasing activity across the markets since the state legislator repealed the controversial HB2 bill in May.

Real Estate fundamentals are extremely attractive, with rapid job creation, low vacancy levels and rising rents.

Over 8% growth year-over-year in the CBD according to CBRE.

These strong characteristics have put the Charlotte office market into expansion mode, with approximately 1.9 million square feet currently under construction.

We believe though that this new supply is manageable, when compared to the total market.

And we see better traction on the lease up of this new projects -- product, which we now hear is over 60% committed.

Moreover, our 3.1 million square-foot portfolio is secure and stable, at 98.3% leased, with less than 5% of the lease space expiring through 2019.

In Austin, the market continues to fish steady growth.

At quarter end, our 1.9 million square-foot portfolio was 95.4% leased.

We continue to monitor the new product delivered this cycle in Downtown, Austin as well as the 1.1 million square feet currently under construction, most of which has been absorbed.

Demand continues to be robust, with few multi-floor options available in the existing space in the CBD.

And to that end, we continue to explore potential new development opportunities with current customers, as they look to expand their Austin footprint.

On the capital markets front, demand for Class A office towers remains very healthy.

And valuations in Austin continue to be solid.

Lincoln Property Company's [sitting] Colorado Building, is on the market today.

And pricing is rumored to be north of $650 per square foot.

As a point of reference, we developed and delivered Colorado Tower in 2015, for $338 per square foot.

Fundamentals in Tampa continue to improve as well, especially in the Westshore submarket, where our portfolio is positioned.

Class A vacancy in Westshore dropped to sub-9% in the second quarter, and with no new supply under construction, we are beginning to see meaningful rent growth for the first time post recession in Tampa, at 4.6% year-over-year.

Similar to what we're experiencing in Austin, we had existing customers looking to expand as well, with few attractive options available.

We are evaluating ways to accommodate these requests within our current footprint, and we'll also explore opportunities to develop, if our customer's expansion needs support a new project.

Lastly, our Tempe portfolio had an active second quarter as well.

First, ADP moved into 111 West Rio in April, taking 100% of the 225,000 square-foot building.

The team also posted another excellent quarter of leasing, including a critical renewal with KPMG, and the expansion of the ZipRecruiter.

What is more impressive about Tempe when looking at our leasing efforts year-to-date, is the second-generation re-leasing spread, up 41% on a GAAP basis, and 39% on a cash basis.

Heading into the back half of 2017, our 1.3 million square-foot portfolio is stable, at 97% leased, with approximately 6.5 years of weighted average lease term.

Similar to Austin and Tampa, many of our existing customers continue to express interest in expansion.

The Tempe team is also looking for creative ways to accommodate these needs, by reshuffling existing customers in our current buildings, or again, potential built-to-suit opportunities.

With that, I'll turn the call over to Gregg.

Thanks, Colin.

Good morning, everyone.

Thanks for taking the time to call in this morning.

Overall, we had a strong and productive quarter.

FFO was $0.16 per share, driven by solid organic growth.

On a cash basis, our same property NOI was up 8.6% during the second quarter over last year, led by 7.6% revenue growth.

The legacy Parkway same property portfolio saw cash basis NOI growth of 11.7% during the quarter, led by 10.2% revenue growth.

These are powerful numbers that reflect the underlying quality of our urban properties as well as the continued strength of our Sunbelt markets.

As Colin discussed earlier, we also saw double-digit increase in our rent rollups during the quarter, with second-generation net rents increasing 13.5% on a cash basis.

I'd like to point out that we made a change to our office leasing activity schedule, on Page 15 of the supplement of this quarter.

We've now broken out free rent as a separate line item within leasing costs.

Hopefully, you'll find this increased detail helpful, as you analyze the economics of our leasing activity.

With that, I'd like to begin my comments by highlighting 3 significant items that impacted our results this quarter.

And I'll move on to the property transactions we completed, followed by our capital markets activity.

I'll conclude by updating our 2017 earnings guidance.

Starting with the significant items, we again recognized an unusually large amount of termination fees during the second quarter.

In total, we recorded $3.1 million in termination fees, the vast majority of which came from 6 customers.

Clearly, there are economic benefits of these fees.

But I'm also happy to also report that we've already executed new leases to backfill 5 of these spaces.

The sixth space is here in Atlanta, at 3350 Peachtree.

Blue Cross gave us notice in April on approximately 28,000 square feet, that they will vacate at the end of the year.

And as a quick reminder, termination fees are not included in our property level NOI.

We include them in the Other Income Section of our supplement.

Our general and administrative expenses during the second quarter were also unusually large.

This was primarily caused by an increase in our long-term incentive compensation accrual, driven by our recent strong share price performance.

As has been the case for many years, in order to ensure managements interests are aligned with our shareholders, the vast majority of our performance-based, long-term incentive comp here at Cousins is determined by our total return performance, relative to the SNL office index.

During the second quarter, our total return was a positive 7%, compared to a 0.1% decline in the office index.

As a result of this relative outperformance, our compensation expense increased approximately $2 million during the second quarter.

And later in the call, I'll discuss the implications of this on our full year G&A guidance.

Finally, we recognized a $1.8 million gain on debt extinguishment during the second quarter.

This was primarily the results of pre-paying several mortgages we assumed during the Parkway merger.

At the time of the merger, we marked all Parkway assumed to mortgages to market.

In general, these mortgages had above market interest rates, so the mark-to-market created a premium.

Per GAAP, this premium is amortized over the remaining life of the mortgages.

And this amortization reduces interest expense.

Most mortgages permit prepayment a few months early without [print] penalty, and we took full advantage of this whenever possible.

The result is that we had accelerated the amortization of the premiums on these mortgages and recognized a gain on debt extinguishment during the quarter.

This is only a timing issue.

All of these mortgages matured in 2017, so from a GAAP perspective, all we've really done is pull forward the amortization of the premiums within '17, and moved this premium amortization from interest expense to gain on debt extinguishment.

There is no impact on full year FFO numbers.

Next, I'll move on to our property transactions.

As Larry discussed earlier, we sold 2 assets during the second quarter, generating approximately $316 million in gross proceeds at [our fair].

As we previously discussed, these proceeds will be used to fund our existing development pipeline, which is now completely pre-funded on a leverage-neutral basis.

Since we have sold these assets in advance of actually deploying the capital into our development effort, we've temporarily reduced our leverage, below our stated long-term objective, of approximately 4.5x net debt-to-EBITDA.

As of June 30, our net debt-to-EBITDA was 3.9x.

However, you'll see this slowly move up toward the 4.5x range, as we spend this capital on our development pipeline over the several quarters.

In the capital markets, we completed our inaugural $350 million private placement of senior unsecured notes during the second quarter.

These notes are divided into 2 different tranches, to fill specific holes in our debt maturity schedule.

First tranche is a 10-year, $100 million note, at a 4.09% fixed rate, which was drawn in April '19.

The second tranche is an 8-year, $250 million note at a 3.91% fixed rate, that we drew subsequent to quarter end on July 6.

This new debt refinances $359 million, in assumed Parkway debt that we recently paid off.

The weighted average coupon on the new debt is 3.96%.

While the weighted average coupon on the old debt was 5.84%, a reduction of 188 basis points.

I'll wrap up my section of the call by providing some detail on our updated guidance as well as some color on our forecast, second half of 2017 same property performance.

Overall, our 2017 FFO guidance remains unchanged, at between $0.58 and $0.63 per share.

The 2 assumptions we've updated this quarter generally offset each other.

First, we've raised our fee and other income assumption, which includes termination fees, to between $18.5 million and $20.5 million, from a previous range of $15 million to $17 million, due to the $3 million in termination fees we recognized during the second quarter as well as an additional $0.5 million we anticipate recognizing during the balance of 2017.

Second, we've raised our general and administrative expense assumption to between $26 million and $28 million, from our previous range of $23 million to $25 million, primarily due to the $2 million increase in long-term comp expense that I discussed earlier, plus an additional $1 million increase in the compensation accrual for the balance of 2017.

Finally, although we aren't changing our same property NOI assumption this quarter, I'd like to take a minute to talk about it.

As a reminder, we originally provided a full year 2017 range for same property GAAP NOI growth of between 2% and 4%.

That range remains unchanged today, and we still anticipate hitting it.

However, the quarter-to-quarter results can be lumpy, especially when the same property pool is relatively small as ours is this year.

You'll see this lumpiness emerge in our same property numbers during the second half of the 2017, primarily driven by 2 items.

First, same property occupancy will fall slightly, as the move-out that Colin discussed earlier take place at our Northpark and in our Terminus assets.

It's only a temporary drop, but it will reduce second half same property NOI.

Second, we were very successful with our 2015 tax appeals at several same property assets, which resulted in a reduction in tax expense in the second half of 2016.

This will create an unusually low prior year comp for our second half 2017 performance.

This same trend will also generally hold true for the Legacy Parkway, same property pool in the second half of 2017.

One quick cleanup item in our supplement on Page 11, we inadvertently transposed first quarter 2017 leased and occupied percentages between Citrus Center and One Orlando Center.

Second quarter percentages were unaffected.

The supplement has been updated and reposted to our website.

I'd like to close by reminding everyone of our upcoming Atlanta Property Tour on September 27 and 28.

We have a unique and compelling portfolio here in Atlanta, and I believe you'll find your time well spent.

Please join us if you can.

With that, I'll turn the call back over to the operator for your questions.

(Operator Instructions) Our first question today comes from Michael Lewis from SunTrust.

First, I want to congratulate Colin on the expanded role.

And also to Larry.

But Larry, I wanted to ask you, your thoughts about the pluses and minuses of having those Chairman and CEO roles, separate versus combined?

And then kind of the rationale for the change?

I don't know if Taylor Glover -- or why he is no longer chairman.

But maybe you could talk about a little bit about that.

Yes.

Really if you -- Michael, Taylor Glover is a very accomplished person in terms of investing in his career.

He's Vice Chairman of the Cox Board, one of the largest private companies in the country.

He manages also all of Ted Turner's business empire.

He's been on our board for probably -- at least 10 years, and he's been our Chair.

If you look at the job description that we have for Chair, it really is not significantly different than a Lead Director position, and Taylor will move from the Chair position to the Lead Independent Director position.

So it really is the board acknowledging that we're at a point, where the company is really focused on not only running our operations but taking a look at the strategy for the next 5 to 7 years for this company.

And I want to make sure that we get ourselves structured, from an organizational standpoint, to put our strong players in the right position for the next run whenever that opportunity comes.

When I think back on the last 7 or 8 years, I think of so many times that we have come together, Gregg and Colin, Pam and I, and the team underneath them is just as strong, come together to debate and beat up strategy and try to make the right decisions.

And I just think this, from the board's perspective, puts us all into position.

We're a bigger company now.

Gives us all a little bit time to focus on things that prepare us to be able to grow and take advantage of that next opportunity.

We work a really flat organizational chart here.

So I think when we walk out of the room up from the call and the announcement gets made, we pretty much all go back to our offices and go back to work and try to continue to generate results.

So this is more of a transitioning, preparing the company for the future, looking more at the 5- to 7-year range.

Okay.

I wanted to ask, you mentioned in your prepared remarks about Three Alliance being well committed.

I don't know if you could be any more specific about that.

But maybe if you comment a little on the impact that, that asset leasing off has had on your portfolio?

Maybe that starts to go away now.

Are there any specific buildings or vacancies in Buckhead that you think could also perhaps negatively impact your portfolio in Atlanta?

I'll get the high level, Michael, this is really the only project that Tishman is finishing up in terms of their Atlanta office and Three Alliance.

During the several years of its construction, had very little activity in terms of lease up.

And clearly, the ownership of the building, made a decision to get very aggressive in the last 6 to 9 months in terms of the packages they were putting in front of customers to get the building leased up, and potentially be ready to take to market this year is what we've heard.

So yes, it's had some impact on some specifics customers that we've had.

And I'll let Colin give more specifics on that.

Yes, Michael, it -- we hear in the market that, that building today is roughly 80% kind of committed, whether lease signed or terms have been agreed to.

And we think they'll pretty quickly get that to 90%-plus.

And so as Larry mentioned, it has -- had some temporary impacts on the market, as they have been quite aggressive to get the building stabilized and I think ultimately, sold.

We've had some impact, as I mentioned in my prepared remarks, with CBRE is going to be relocating to Two, Three Alliance.

And so as we look across the market, there aren't any other new buildings that we think will break ground of any significance anytime soon.

In terms of other large blocks, Highwoods has some space at Monarch.

But overall, for a market the size of Buckhead, it's very limited.

And given the improvements that we've made at Terminus, and we look forward to showing you that in September, we think we're going to be very well-positioned to backfill that space as we get that market -- or that space back in 2019.

And we think that as Three Alliance goes away, the temporary pressure we might have seen over the last quarter or 2 will -- should shift aside.

Okay.

And then just one last one for me.

The decision to sell the Orlando portfolio includes a couple of assets with a little bit of a vacancy.

Do you have a sense of investor demand down there?

What you think market cap rates are for these assets?

Michael, I think that there will be good demand for these assets.

They're high-quality buildings.

Very institutional quality buildings.

And we've seen broadly, investors, large investors and foreign investors start to migrate into secondary markets like Orlando.

There has been some activity -- high-quality buildings that have been trading, out in the Lake Mary submarket of Orlando.

And we saw very good depth in buyer interest for those assets.

Similarly, over in Tampa, in Rocky Point, there is a couple of buildings that are in process of trading.

Again, we're seeing very good depth in interest.

And so that gives us a lot of confidence in the interest we'll see in our Orlando assets.

In terms of cap rates and pricing, I think we want to be a little careful at this point not to kind of skew the process as we get ready to bring those to market.

We'd like to present those the right way, and let the market hopefully, do what it does.

And help us achieve a really strong price for our shareholders.

Our next question comes from Jamie Feldman from Bank of America Merrill Lynch.

I guess just starting out, if we could -- Gregg, your comments on GAAP same store, probably moderating in the back half, you've had -- you've hit the cover off the ball here on the cash same-store.

Can you just give us some thoughts on, whether back half of the year into '18, just like how sustainable are these big cash same store NOI growth rates?

Well Jamie, the guidance that we provided at the beginning of the year, between 2% and 4% for GAAP NOI same property performance remain unchanged.

So year-to-date, we've put up a number of 6.5% GAAP NOI growth.

So you do the math on that, and it's clear that the second half of the year has to be slower in order to have the full year fall inside of that guidance.

But it's not an indication of changes of health in the market.

You're going to see the revenue side of that equation continue to do well.

It's just the lumpiness on the expense side primarily.

And it's a function of some artificially low comps from '16.

And some function of some expense pressure in '17.

The expense pressure in '17 is primarily on real estate taxes.

As these markets continue to do well, and as the asset appreciate, we've got to expect some property tax pressures from the municipalities, in which the buildings are located.

And we're starting to see that.

Now we'll fight those like we do every year.

We were successful in '15.

Hopefully, we'll be successful in '16.

But our current guidance and our current forecasts, assume some pretty healthy property tax increases this year versus last year.

Okay.

Maybe a different way of asking you.

I know Colin walked through some of the vacancies coming or I guess, repositioning within the portfolio, since you did have a lot of this space backfilled.

Can you just walk us through how to think about your occupancy over the next couple of quarters?

And then if you can, into '18, just based on what you know is moving?

Sure.

Jamie, as Gregg mentioned in his prepared remarks, we do think that over the next few quarters that we could see -- or we will see occupancy tick down, and primarily driven by a lot of the large customers, that we've been signaling for several quarters.

As you look out at Northpark, Equifax is an August expiration.

Aetna, which we've talked about before, is in October of this year.

We've got at -- down in Tampa at our Harborview assets, the -- we've got a 60,000 square-foot expiration there, with Laser Spine Institute.

And so you'll see, as a result of those -- that occupancy ticks down, and so in terms of our same-store, over the coming quarters, as Gregg mentioned, that could create some pressure.

But again, as we get that space back, we've got the opportunity to lease that back up in 2018, then try to push same-store into a positive position again.

Okay.

And then I know you walked through a bunch of them.

Is there anything in '18 that you didn't mention, that is a known move-out, that sizable?

Again, Harborview is at the beginning of '18.

The other significant expiration in '18 will be in the latter half of the year in November.

And again, that's a good story of kind of Cousins value creation.

Dimensional Fund Advisors had leased 2 floors at Fifth Third Center.

Really, it's temporary swing space, until we complete and deliver their new project in the south end.

So we will get 2 floors back in -- at the Fifth Third Center.

Okay.

And you guys had commented about putting capital to work.

One of the ways is existing tenants in the portfolio wanted you to expand.

Are you -- were you commenting may be you could expand into more markets with new tenants?

Or this would all be within the same footprint?

Jamie, when I look at our sort of 3 to 6-month window, in terms of where the tenant activity is, we have -- it's existing customers that want to expand in the existing markets that we're with them.

So we have those opportunities.

And we're -- I'm optimistic that one or 2 of those will have a good chance to plan out, and we can give more color on them between now.

So it's not taking them in the new markets.

It's us helping to accommodate their growth in the existing markets they're doing business with us in.

Our next question comes from John Guinee from Stifel.

Congratulations, Larry.

Congratulations, Colin.

I guess this is for one of you guys.

If you look at the office and also the retail world out there these days.

It seems like most moves are done on a turnkey basis in terms of both tenant improvements and sometimes even moving allowances.

And the norm or the quid pro quo, is increase in rental rate.

Said another way, the tenant is willing to pay the rent if they can avoid the upfront capital costs.

And the landlord appears to be more and more to be financing corporate America.

Is that a fair analogy of how the leasing world is evolving?

John, I would say that we have seen some pressure on tenant improvement allowances kind of upwards.

I don't know that I would -- I think you should look at kind of what's driving that.

I don't know if it's totally landlord financing corporate America.

A big part of it is just construction costs continue to rise.

And so as those have increased, that has certainly put some pressure on our TIs.

As I look back over our last 4 to 6 quarters.

It held relatively steady in certain quarters like this one.

It's a tick higher than probably the last couple of quarters.

But we also had pretty healthy activity leasing-wise at our Avalon project, where it's [shelf] condition versus second-generation space.

And that typically comes at a higher cost.

But we'll continue to look hard at this.

And as costs have gone up, as we've mentioned in our prepared remarks, we have started to see some real meaningful rent growth in these Sunbelt markets.

In Atlanta, in Austin, that had taken hold several years ago.

But we're pretty encouraged to now see that playing out in markets like Tampa as well.

Great.

And then the second question, regarding the build-to-suit environment.

One, are these build-to-suits on Cousins' own land or other land?

And then, besides Highwoods and Hines, who are your major competitors when you're bidding a build-to-suit opportunity?.

John, it's truly -- let me take the first one on sites.

We really have both, we have some customers that have -- we have identified sites already in our control that we're pitching but we also have a couple of that have come to us and it's very similar to what we do with Dimensional Fund Advisors where they came to us and say, let's go collectively as a team, go pick a site and then we all want you to do it.

So we have a sort of a combination of those things.

I think, when you look at the competitor, it's very different market to market.

And -- but generally, on these build-to-suits, somewhere in the capital stack there has to be an institutional partner whether it's the insurance company or a REIT or some other version of it.

And I don't know if we have a predominant type that we are competing against.

Oftentimes -- and I think it goes to this whole thing of urban and talent, oftentimes it's more the location of the site and how that works with their recruitment view within the company.

I think one of the most interesting changes we're talking about at our board meeting this week, that you used to get 10 years ago, when you had a corporate relocation or major expansion in the market, you knew that the ultimate decision was really being driven by the CEO.

And today, you really see HR is -- the head of HR being the one driving those decisions.

One of the build-to-suits that we're looking at, decision got delayed because the HR director had a medical leave that had to take place.

So it's -- I think it's a very interesting thing and it plays well to markets and submarkets we are situated in.

Our next question comes from Jed Reagan from Green Street Advisors.

In terms of the Orlando sales, are there material taxable gains that you need to be mindful of protecting the 1031 or special dividend?

And then maybe just in general, can you talk about the supply-demand characteristics of that market that made you feel like it wasn't a long-term hold for Cousins?

Jed, it's Gregg.

I will tackle the tax issue and then I will turn it over for the other.

We're still kind of zeroing on what we think ultimate pricing will be, but clearly we have a range, and we have done our tax work around that range.

We will be able to absorb that gain without a 1031 nor without -- nor with special distribution.

So I don't think you'll see any tax repercussions or distribution repercussions as result of our sales over at Orlando.

And I think that Jed, in terms of the market, Orlando shows strong job growth.

That job growth, we haven't seen transformed into strong office growth for the type of assets that we have, it's not -- I mean Orlando is a good market and it does seem to be picking up some speed.

We don't know of any -- there's one building rumored to be started -- get ready to start in the next 6 months in Downtown, that's a couple of hundred thousand square feet, we don't know if that is -- will happen or not.

But I think the other thing when we look at Orlando is the -- the assets we have, probably the 2 of them aren't located in the part of Downtown that drives the strongest rents in terms of customer decisions.

They are great assets and I think they'll lease up but they just don't really fit our profile as well as we would like.

So it's really a combination of sort of the slow growth plus the asset locations versus what we would like to see in our portfolio.

Okay.

That's all helpful.

And you mentioned, you're acquiring another site at the Avalon location.

Can you give a sense of the scale and cost and potential timing there?

Sure, Jed.

It -- So we have closed on the second site and as Larry mentioned, it's the last -- second and last office site within Avalon and it's actually the last site as a whole within Avalon.

And it will be completely built out when -- if and when the second building goes.

It -- we're targeting about a, call it 225,000 square-foot to 250,000 square-foot building, it's very similar to what we just completed at 8000 Avalon.

And we're excited about opportunity in front of us, as you look at the customer base that will occupy the first building, it's names like Microsoft and Crown Castle and so we think that there is going to be very, very solid interest in the second building with large corporate customers like that.

We are going to be very thoughtful and disciplined though as to kind of when we start that, and as Larry mentioned earlier, we look for very significant pre-leasing on that project before we move forward.

So don't have a good target for you, it's ultimately going to be driven by customer interest.

So our leasing team in conjunction with Hines is hard at work on that.

We're going through the process now with fully designing the building.

So kind of when that customer interest comes, we will be in the position to move very quickly.

And Jed, it's Gregg.

That piece of land and that building will be developed under the same joint venture structure with Hines as the first space of Avalon was built.

Okay.

That's helpful.

And just one more for me.

There's been some media reports that you're looking at a land site in Midtown Atlanta.

Can you comment on that and maybe, how much density that could support?

And just maybe in general, how the hunt for other potential land sites is going?

I would say that the one in particular that was mentioned in the paper just demonstrates that news gets slow during the summertime and so that was an extraordinary speculative report that I wouldn't spend much time thinking about relative to us, it is an attractive site but I don't sense that there is any immediate transition or sale plan by the current owner who's had it a long time.

But on the larger scale, as we have said, we have been looking for sites in all of our key markets.

And -- but Jed, we're being very disciplined because I think is as the cycle matures, as the multifamily cycle slows a bit, we'll start to see some wider opportunity and some prize softening on the sites.

And we are actively working on many sites, but we're doing it with a lot of thought and not a sense of urgency and to try to over pay or to pick a site that 6 months later there is better one available across the street or something.

(Operator Instructions) Our next question comes from Dave Rodgers from Baird.

You addressed a lot so far.

But I think Larry, one thing you said early on was the 8000 Avalon was garnering rents maybe somewhat comparable to Buckhead.

And I think in recent tours Midtown also achieving rents in -- at least in some places -- comparable to Buckhead.

So again, Colin or Larry, just curious on kind of your thoughts on what's happening in the Buckhead market?

Is it purely a function of Three Alliance?

Is there just a shift in Atlanta in terms of how space is being used and larger tenants needing to kind of leave that submarket that's just kind of creating a little more transitional vacancy?

So just thoughts overall?

Well I think overall you have to look at Buckhead, and it's a 17 million square-foot market, and there has been one new building at 500,000 feet delivered in the cycle.

And so I think the Three Alliance is a couple of quarter sort of very specific but relatively minor impact on the overall market.

I do think we're seeing firms that are looking -- you've got one of the larger firms that is going to the Three Alliance building is a Central Perimeter firm, that is moving to Buckhead.

One of the customers is moving out of Terminus, Bain is moving to Midtown.

So you're seeing sort of certain industries starting to select areas to be in -- Midtown has traditionally been a law market.

But now you're seeing it be a technology and sort of creative services market, Buckhead has always been a very strong financial services, private wealth management market.

And that is continuing to play out.

And you're seeing some larger firms as we say comes from suburbs in.

I wouldn't read a whole lot in to the current trending.

Although, as we look to the future and the company grows, we certainly would like to continue to increase the things we are able to own both in Buckhead.

But as well as in Midtown to grow it as a percentage of our land.

Our holdings in Atlanta.

And then Larry, one of things that you had mentioned in the beginning.

It sounds like and maybe Three Alliance is the perfect example of it is that you'd seen or experienced spec construction at this point in the cycle.

But if I read into your comments, you don't really expect to see any, is that just because what's in the pipeline, do you feel that other developers like yourselves are becoming more disciplined maybe in terms of build-to-suit starts.

Just what's in the pipeline out there that gives you more confidence?

Any more color on that would be helpful.

Well, it's interesting we were talking before the call, if you look at our markets, Orlando, Tampa and Tempe have nothing been built, in terms of new product.

Austin, Downtown Austin, which is just under a 9 million square-foot market has 3 projects being under construction.

One that just delivered but they're 90% pre-leased.

As we talked about Buckhead, Midtown Atlanta 17 million square-foot market has one building just coming out of the ground.

750,000 feet, that's 60% pre-leased.

Charlotte has 3 projects, one just delivered that are on a 17 million square-foot market, it's 1.8 million feet, they're 60% pre-leased.

So we do have some supply coming but it's so small compared to the overall market and we don't sense that there is the 400,000 and 500,000 square-foot spec type of deals that have any type of short-term expectation on our part that will get started in any of the markets that we're in.

Dave, I would just add in terms of development today.

It's hard in these urban submarkets, relative to suburban markets, finding suitable land sites has become more and more challenging, especially with kind of multifamily developers taking a lot of that existing land inventory.

And so as we're trying to grow and expand with our existing customers -- finding that available land site is very, very difficult.

And in the financing side, it still can be challenging and as we look across our submarkets, a lot of our competition is -- are private developers.

And so as Larry mentioned, they need to find the institutional capital and they also need to find a construction loan, which comes with guarantees and the like.

So that's made it more challenging to kind of put those together in the urban core.

And ladies and gentlemen, at this time, I'm showing no additional questions.

I would like to turn the conference call back over to Mr. Gellerstedt for any closing remarks.

We appreciate everybody being on the call today.

We hope that a lot of you will be able to come to Atlanta for our September property tour.

And we hope everyone is enjoying the rest of their summer.

Thanks, very much.

Ladies and gentlemen, that does conclude today's conference call.

We thank you, for attending.

You may now disconnect your lines.